China fights economic crisis, sticks to costly ‘zero COVID’

BEIJING – Chinese leaders are struggling to reverse an economic slump without giving up anti-virus tactics that have shut down Shanghai and other cities, adding to challenges for President Xi Jinping as he tries to extend his term in power.

The ruling Communist Party has said its “zero COVID” goal of preventing all infections takes priority over the economy. It’s a move with global implications and comes despite warnings from experts, including the head of the World Health Organization, that the target could be out of reach.

“We don’t think it’s sustainable,” WHO Director-General Tedros Adhanom Ghebreyesus said on Tuesday.

China kept infection numbers low until earlier this year with a strategy that shut down cities but led to soaring costs. Beijing has moved to “dynamic cleaning” which seals off buildings or neighborhoods in the event of an infection. But with thousands of new cases of the highly infectious omicron variant reported every day, it keeps most of Shanghai’s 25 million people at home. Large parts of Beijing and other cities with tens of millions of people are also closed.

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This is disrupting manufacturing and hampering the global flow of goods from smartphones to iron ore, increasing inflation risks in the United States and Europe. Consumer spending is weak, dampening Chinese import demand.

The ruling party is promising tax refunds and other aid to struggling entrepreneurs Beijing relies on to create jobs and wealth. Premier Li Keqiang, No. 2, warned last week that the employment situation was “complex and grim”.

At a cabinet meeting on Wednesday, Li called on officials to focus their spending and credit policies on preventing job losses, state television and the official Xinhua news agency reported. They gave no details of any new initiatives.

Despite promises of aid, forecasters say economic growth in the current quarter will drop to 1.8% a year ago from an anemic 4.8% last quarter. Growth for the full year is expected to be as low as 3.8%, below the ruling party’s official target of 5.5% and less than half of 2021’s 8.1% expansion.

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“The Chinese government is willing to make sacrifices on the short-term economy to trade for long-term growth,” Nomura economist Ting Lu said. However, he said, “achieving the “zero COVID” is quite difficult, because omicron is more contagious”.

A Foreign Ministry spokesman on Wednesday called China’s approach realistic.

China’s strategy is “not to aim for zero infection but to control the epidemic situation in the shortest time and at the lowest social cost”, said Zhao Lijian. “The vast majority of people in most parts of China live and work normally.”

Complaints about food shortages and other hardships and videos posted online showing residents in Shanghai and other areas arguing with police have been deleted by censors.

Public frustration and economic losses add to complications for Xi ahead of a ruling party congress in October or November at which he is expected to try to break with tradition and give himself a third five-year term in office.

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Xi, China’s most dominant leader since at least the 1980s, is still expected to get another term. But experts say his rivals could have leverage to reduce his powers. Proponents of market-based economic reforms also want to roll back policies that favor state industry and tighter control of the private sector, China’s economic engine.

Quarreling over the cost of anti-virus strategies gives “openness to factional adversaries” with “deeper ties to commercial sectors,” Diana Choyleva of Enodo Economics said in a report. “They are more aware than Xi and his supporters of the impact of zero-Covid on the economy and on middle-class citizens.”

In a sign that private industry is weakening, 4.4 million businesses closed last year while only 1.3 million new businesses opened, compared to 13.8 million in 2019, according to Choyleva.

COVID restrictions have shuttered factories or suspended access to manufacturing hubs for autos, electronics and other industries, including Changchun and Jilin in the northeast and Guangzhou and Shenzhen in the south.

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In the central city of Zhenzhou, restaurant Xiao Nan Guo closed on May 4 but is still paying its 100 employees, according to employee Wang Huiqin. She said business was down about 40% before restaurants in the city of 13 million people were ordered to stop providing dine-in service.

“If the situation lasts a few weeks, the company can deal with it,” Wang said. “If it lasts longer, there will be problems because the costs will be too high.”

In Shanghai, most businesses have been closed since late March at an estimated cost of tens of billions of dollars per month in lost business.

Cargo volume at the port of Shanghai, the busiest in the world, is down 30%. Economists say overseas customers are looking for non-Chinese suppliers who might be more likely to deliver but charge more.

“It will further increase the risk of stagflation this year” in Western economies, said Tommy Wu of Oxford Economics, referring to a scenario of rising prices and falling economic activity.

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Export growth in April fell to 3.7% from a year earlier, from 15.7% in March. Imports rose 0.7%, in line with growth of less than 1% the previous month.

China was the only major economy to grow in 2020 after Beijing shut down factories, stores and offices across the country to fight the virus. The ruling party declared victory after a few months and reopened the economy.

Last year, Xi’s government reverted to long-term plans that include trying to reduce excessive property debt. This triggered a plunge in construction and home sales in mid-2021.

In a sign of the intensity of the economic pain, Beijing is facing calls from foreign companies that generally avoid questioning official policy for fear of reprisals.

The American Chamber of Commerce in China says its members want a “more optimal balance” between disease prevention and business.

More than half of the 121 companies that responded to a survey from April 29 to May 5 have delayed or reduced their investments, according to the chamber.

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“Members see no light at the end of the tunnel,” chamber speaker Colm Rafferty said in a statement.

At a meeting on May 5, party leaders appeared to reject those calls and the “living with the virus” stance taken by other governments.

The relaxation of virus control measures will lead to “large-scale infections, serious illnesses and deaths” and “seriously affect” the economy, they said in a statement. Closing the debate, he said “all sectors of society” should “unify their thoughts and actions” with party leaders.

Instead of abandoning their growth goal to pursue “zero-COVID”, party leaders “want both”, Larry Hu and Xinyu Ji of the Macquarie Group said in a report.

“Zero-COVID at the cost of increased unemployment is a tough sell for China’s top leaders, especially in a year of such political significance,” they wrote.

This week, the Ministry of Industry asked local governments to help contractors with rent, utilities and other expenses. He warned that “the production situation is not optimistic.”

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“We urgently need to take further effective measures,” a statement from the ministry said.

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AP researcher Yu Bing contributed.

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